CBA issues rare tier two subordinated debt

Commonwealth Bank completed a A$1 billion a Basel III compliant, tier two subordinated debt issue on Friday, priced at 195 basis points over bank bills.

The CBA is a very rare issuer of tier two debt. ADCM Services data shows that the last issue in the domestic market occurred in May 2007, when the bank sold $500 million of ten-year non-call five subordinated debt at a spread of just 24 bps over the bank bill swap rate.

The last international issue was in July 2009, when the bank raised €1 billion at a spread of 190 bps over Libor. And unlike its domestic peers, the bank has no subordinated debt in the retail market.

That said, the bank could not have expected to extract any rarity discount in the pricing of the issue. It has plenty of senior debt and additional tier one capital outstanding to satisfy investor demand for exposure to the bank.

So while the price talk on the launch of the issue was around 190 bps and secondary market spreads on comparable issues from ANZ and Westpac had come in to around 180 bps, the pricing at 195 bps looks about right.

CBA no doubt went for volume rather than trying to finesse the price. Any investors looking for a profitable arbitrage on the transaction can buy protection for Basel III compliant CBA subordinated debt for around 120 bps in the CDS market, at the present time.

Interestingly, the senior to subordinated debt pricing ratio runs at a little over two times in the CDS market, compared with around 2.75 times in the physical market.

And for those retail investors feeling that they are missing out, now that subordinated debt issuance by the major banks has returned to the wholesale market, Westpac's WBCHB subordinated notes are currently offering a trading margin of 213 bps.

The Basel III compliant notes are offering a better margin and should be called in August 2018, which makes them a comparative bargain.